Jobless Rate Dips In April

Inflation Fears Infect Market

U.S. businesses went on a hiring binge in April that sent the nation's unemployment rate to its lowest level this year.

But the Labor Department's glowing report Friday triggered a wave of inflation fears among investors that swamped bond and stock prices.

The Labor Department said healthy gains in construction, retail trade and services helped add 267,000 jobs and drop the national unemployment rate to 6.4 percent, from 6.5 percent in March.

Illinois' unemployment rate fell to 5.5 percent in April, half a percentage point lower than in March. Illinois had the second-lowest unemployment level among the industrial states. North Carolina's rate was 3.9 percent.

Investors, apparently fearing that the evidence of faster economic growth would spur the Federal Reserve to increase interest rates in order to curb inflation, sent stock and bond prices plunging.

The yield of the benchmark 30-year Treasury bond, which rises when prices drop, increased to 7.54 percent from 7.32 percent on Thursday. It was the highest yield since December, 1992.

The Dow Jones industrial average fell 26.47 to 3669.50, bringing its loss for the week to 12.19.

The employment gains outstripped analysts' expectations of an increase of 170,000 jobs, which would have been considered a healthy figure, especially since a three-week Teamsters Union strike idled 70,000 workers temporarily last month.

"The bond market got trashed," said Diane Swonk, senior regional economist for the First National Bank of Chicago. "The reaction is, `Oh, my God, inflation has taken off.' The market hasn't given credit that the Fed has already taken a pre-emptive strike against inflation."

Because of the market turmoil, she said, "I wouldn't be surprised if the Fed raised rates next week."

She expects a rise of a quarter of a percentage point in the federal funds rate. The fed funds rate, which is what banks charge each other for short-term credit, is key to the short-term interest rates in much of the U.S. economy, including those on certificates of deposit.

Swonk also expects an increase of a half a percentage point in the discount rate, which is the rate at which banks can borrow money from the Federal Reserve.

"That doesn't mean much to consumers, but it is symbolic," she said.

Even without the unexpectedly strong employment numbers, the Fed was "going to tighten and raise interest rates," said Swonk. "This is just one more piece of evidence in their favor."

Even in view of the strong numbers, however, the bond market is "overreacting," said Swonk.

She expects the core rate of inflation-which excludes food and energy-to be only 3.75 percent by the end of the year.

"That contrasts with a core rate of 4.5 percent during the 1983 to 1989 expansion," she said.

The employment report's numbers were "strong" but should be taken "in context," she said.

"The return of nice weather meant the construction market in the Midwest and East could pick up," she said. "It also picked up in California in the wake of the earthquake."

In addition, the bottoming out of interest rates "is pulling people into the housing markets," she said.

"Construction gains are going to play out," she said. "Once you get the inital push from the earthquake and from the pentup demand from winter, you don't have as large gains anymore," she said. "Beyond the second quarter, it's going to be tough to hold up this kind of construction employment."

She noted that overall, the unemployment rate "didn't go down very much."

In Illinois, manufacturing will exert "more power" than housing construction, said Swonk.

"Caterpillar has said it hopes to have a recall of 1,000 workers completed by this month," she said. Chrysler is trying to put a third production shift on at its Neon plant in Belvidere. And Mitsubishi has announced that it intended to put 500 more workers on at the Bloomington plant this spring."

Adding to the rosy jobs picture, the Labor Department said March non-farm payrolls were revised up to 464,000 from an originally reported 456,000.

The national average workweek remained at the post-World War II record high of 42.2 hours set in March, but average hourly earnings rose 0.3 percent to a seasonally adjusted $11.06.

On Wall Street bargain-hunters moved in during the last hour of trading, paring the Dow's losses nearly in half. The Dow was down more than 50 points at midafternoon, prompting the New York Stock Exchange to impose restrictions on program trading.

NYSE declining issues outnumbered advancers by about 3 to 1. Volume totaled 289.71 million shares, up from 255.68 million on Thursday.